Monetary Policy Controlling the expansion and/or contraction of the money supply Influences the cost and availability of credit Fractional Bank Reserves Banks only keep a fraction of their deposits as reserves Legal reserves – coins, currency, and deposits that fulfill reserve requirement Member banks keep some reserves at Fed district bank  Known as member bank reserves

Key Monetary Terms Liabilities debts and obligations to others Assets Properties Possessions Claims on others Balance sheet Condensed statement showing all assets and liabilities Net worth Excess assets over liabilities

How Banks Operate Organizing a Bank Obtain a charter Bank has corporate structure  Investors help build assets Balance Sheet Assets – Liabilities = Net Worth Assets = Liabilities + Net Worth AssetsLiabilities Required Reserves:Demand Deposits: Cash: Loans:Net Worth Equity: $20 Bonds: Buildings and Furniture: $20 $20

Accepting Deposits Deposits are reflected in two ways 1. liability to indicate asset is owed to depositor 2. asset to show cash is property of bank Deposits are shown as asset and reserve AssetsLiabilities Required Reserves: $10Demand Deposits: $100 Cash: $90 Loans:Net Worth Equity: $20 Bonds: Buildings and Furniture: $20 $120

Making Loans Bank is free to loan out excess reserves Once loaned, that money moves to loans, or accounts receivable Bank makes income on interest charged for loans Used to pay bills Then generally paid out as stock dividend AssetsLiabilities Required Reserves: $10Demand Deposits: $100 Cash: Loans: $90Net Worth Equity: $20 Bonds: Buildings and Furniture: $20 $120

Reaching Maturity Bank will grow and diversify assets and liabilities Some banks buy bonds and securities Earn interest High degree of liquidity Also offer certificate of deposit and savings accounts Attempt to maintain a 2%-3% spread on loans Ensures the bank will make money